Philip Clarke, the chief executive of Tesco, admitted the need for "fundamental
change" as the company committed £1bn to turn around its ailing UK
business.

Unveiling the first fall in domestic profits for at least 25 years, Philip Clarke said the group would drastically scale back the amount of new selling space it was opening in this country. Tesco plans to build fewer hypermarkets, focusing instead on convenience stores to take advantage of the company's growing 'Click & Collect' service, which allows customers to order online and pick up in store.

"It is a fundamental change," Mr Clarke said. "We think we are moving into an era now where consumers will buy more online."

The change in strategy was unveiled as the company reported a 5.3pc increase in pre-tax profits to a record £3.84bn in the year to the end of February, on turnover up 6.8pc to £64.5bn. However, these figures were significantly lower than analysts had expected six months ago. The supermarket suffered from a drastic loss of customers in the UK over Christmas, as they defected to rival chains, prompting a major profit warning in January. The retailer, however, still has a 30.2pc share of the market.

<noframes>Interactive chart: Number of Tesco stores</noframes>

UK trading profits fell 1pc to £2.48bn. Records going back to 1986 indicate Tesco has never recorded an annual fall in profits from its UK supermarkets. Records before that are unreliable.

Mr Clarke said the defection of customers was mostly due to a smaller number of staff in supermarkets, which analysts said had caused poor customer service and gaps on shelves. He said: "We just took a little bit more out of the stores than we put back in. So, we are putting more love back into the stores. That's our plan to make Tesco better in the UK."

The plans, which will cost £400m of capital expenditure and £600m of revenue, are designed to make the stores "warmer", with more staff, higher quality products, new advertising, and £150m invested in a revamped website. A quarter of Tesco's selling space will be "refreshed" this year.

Mr Clarke also said some of the money would be used to cut prices. Analysts said this was worrying for rival supermarkets.

Clive Black, at Shore Capital, said: "Tesco has said they are lowering their operating profit margin to 5.2pc and keeping it there. That suggests any pick up in profitability, thanks to an improving economy, will be ploughed back into lower prices and new products, not into margin. That is quite a serious issue for the competition."

Tesco

Most analysts gave a cautious welcome to the £1bn investment programme but said it would take years before improvements in the supermarkets allowed the company to regain lost ground.

Tesco's shares fell 5.6 to 322.7p.

Meanwhile, Tesco's revamp was knocked off course before it had started after it was forced to publish a correction to its official stock exchange announcement.

It originally said its final dividend was 14.76p a share. It then admitted this was a typo and, in fact, its total dividend. The final dividend was 10.13p.